How Google Slips To $100 a Share - And Stays There

Worried lest our last post on this topic (How Google Hits $1000 a Share) might become a Blodget-style self-fulfilling prophecy, here is the other side of the argument. Succinctly, Google (NASDAQ:GOOG) is not Microsoft (NASDAQ:MSFT).

Microsoft makes all of its money from its operating system and office tools (actually over 100% since its entertainment biz is not yet profitable). These both benefit from the celebrated network effect: for every product sold all existing customers benefit - the more Windows PCs there are, the more programs will be developed for it.

Google makes all of its money from search related advertising (actually over 100% since it gives away lots of software, including the hosting of many blogs, in the hope of revenues to come). But search is not a beneficiary of the network effect and neither are the advertising programs Google inserts. Your search is not easier because other people have searched before you. The amount advertisers pay per keyword is, if anything, higher because of Google's dominance. The service is used because Google built a better mousetrap. But another, better algorithm is just around the corner. Ask.com (NASDAQ:IACI) could be to Google as Google was to Yahoo (NASDAQ:YHOO), for example. And as Yahoo was to AOL (NYSE:TWX). Google has not developed sticky applications or given up so much margin that it has economies of scale. The reverse is true. Google's margins are so high, it is easy to see how smaller rivals could come in to its markets. And we would all switch again. Why wouldn't we?

Were Google to switch places with Microsoft in these rankings its revenues would fall by at least two-thirds, to $3 billion and its earnings per share to, say, $3. Even with the market growth forecast in our last piece, the stock would find it hard to go north of $100 for some years to come.

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